Product Liability Insurance

The Cushion to Your Fall

Business owners are accountable for every product they create or sell on the market. If a faulty product causes injury or property damage, your company could be liable for the repercussions. In some cases, your business might not be at fault, yet you still find yourself intertwined in a lawsuit. Given that, having product liability insurance for your business can help reduce your losses from such situations. 

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Product Liability Insurance 

It is a specialized policy that helps you with litigation costs resulting from injury or property damage due to your product’s use. To clarify, following anyone’s property damage or injury, you may face a lawsuit if it’s proven that your product induced such an unfortunate event. The plaintiff does not necessarily have to be a customer.  

The Glitch in the Switch!

You may have come across various news about product liability suits. One such case that hit the headlines was that of General Motors (GM). In February 2014, information regarding several GM automobiles with faulty ignition surfaced in the media. The defective switch could abruptly shut the engine off and disable brakes and power steering; airbag inflation too was prevented when needed.

Unsurprisingly, according to The Washington Post, the faulty ignition led to more than 174 deaths. GM paid billions to recall more than 30 million defective trucks and cars following the accidents. While the employees faced no criminal charges, GM was subjected to a $900 million fine. Additionally, according to Investopedia, the automaker faced suits of $10 billion by GM vehicle owners. The vehicle owners claimed on the premise of lost resale value, following damage to brand image.  

What does Product Liability Insurance Cover?  

A product liability policy can be instrumental in averting the litigation costs arising from the following kinds of claims:

Manufacturing flaws 

Manufacturing flaws occur during production. These flaws could be due to using the wrong materials, errors while assembling products, or lack of quality control. Even a minute’s negligence can cause potential bodily injury, and property damage, resulting in hefty litigations against you.

The example of GM demonstrates how a manufacturing flaw can lead to a company’s financial injury.

how-much-does-product-liability-insurance-cost

Design defect 

Design defect differs from manufacturing defects. A design defective product is inherently dangerous to use. Even after proper manufacturing, your product can be harmful due to design defects. Such incidents bring lawsuits that could seriously injure others as well as your financial stance.

An investigation by CNBC uncovered Remington’s internal documents that warned engineers about the theoretically unsafe design. The defective design caused the guns to fire without the triggers being pulled and a class-action suit was filed. The attorney fees alone were $12.5 million. Product liability policy saves you from such financial woes.  

False marketing 

Aggressive market competition makes companies prone to overselling their products. To increase sales, companies sometimes make false claims while promoting. Consequently, people may file complaints on the premise of over-promise, under-delivery.

For example, Standford Arts Review reported that Apple had claimed that its Powerbeats headphones were sweat-proof. Additionally, the company also claimed that the Powerbeats 2 and Powerbeats 3 have 6- and 12-hours battery life. Turns out, those claims were false. Consequently, Apple had to pay $9.75 million for settlement.

Misleading labels 

Product labels provide information to consumers regarding the product. For instance, the labels on your clothes detail their fabric composition and instructions on how to care for them. Likewise, food products have labels to give information regarding ingredients, recommended storage methods, etc. Many customers make their purchase decisions based on such information. Hence, a misleading label can be a serious offense.

The Food and Drug Law Institute reports that the pandemic has brought a massive disruption in food supply chains. This is likely to put many companies under extreme scrutiny. Food businesses are now labeled as essentials and have to follow additional COVID-19 policies placed for them.

A famous example for mislabeling products can be seen as the case of “truffle oil” not containing truffles. A specific example would be that of Heinz toddler snacks. According to ABC News, Heinz was fined $2.25 million for deceptive labeling. What the company claimed to be healthy fruit and vegetable snacks for toddlers, actually contained over 60 percent sugar.  

Inadequate warnings

You are responsible for disseminating adequate information to customers regarding the proper assembly or use of your products. Clear and complete instructions ensure the safe use of your products. Failure to do so can backfire on your company. However, product liability insurance protects you from the costs attached to such litigation.

An unbelievable yet true event happened in Florida in 2014. Cynthia Robinson claimed that she lost her husband to cancer due to the negligence of R.J. Reynolds Tobacco Company. The company had failed to inform customers that nicotine causes addiction and that smoking causes lung cancer. According to CNN, the jury awarded her $23.6 billion in punitive damages.  

Strict Liability 

Your company can be liable for injury or damages if a customer gives reasonable proof of your negligence. Even though your company may not intend to cause injuries or damage to customers, you may have to face financial injury. However, the customer needs to prove the following:

  • The product’s defect was harmful.
  • The product caused property damage, bodily injury, or emotional distress.
  • The event of damage or injury occurred during the intended use of the product.
  • No major change was introduced to the product.

Product liability insurance keeps your defense cost and settlement costs down, depending on your coverage limits.

Multiple coverage options on your fingertips.

Choose from various options and select the policy
that best suits your requirement.

Exclusions and Endorsements  

While it seems that product liability policy covers all possible causes of product liabilities, you should know there are many costs that the insurance doesn’t cover.

Product recalls

According to Forbes, Toyota incurred billions while recalling 12 million cars in 2009 and 2010. Such product recall costs are beyond the scope of product liability insurance. However, you can cover such costs via product recall insurance.

Efficacy

Consider that a company sells a fire extinguishing system. The company claims that the extinguisher automatically starts the sprinklers through its sensory device during a fire. A customer reports losses due to a ravaging fire despite the installation of the extinguisher. Turns out, the extinguisher failed to operate when the fire broke out.

Product liability insurance does not cover your company if the products fail to fulfill its intended use or function.

Quality control

Companies need to check the qualities of the products and comply with the pre-determined industrial quality standards. Product liability insurance does not cover for any lawsuits arising from quality issues if found that the products did not go through quality control.

Alteration reporting 

Your business may require the development of new products or alterations to the existing ones. Changes in the products be it ingredients, production methods, or materials used—should be reported to the insurer. Such changes should reflect on the policy. Your insurer may not cover you for lawsuits due to unreported changes.

Material exclusion 

If your product contains certain materials, your insurer may deny compensation. For instance, lead paints may not be covered due to their toxicity. Therefore, if you use lead paint in your product, or use it beyond the advised amount, your insurer may refuse to cover you. Check with your agent to find out more about excluded materials.

Employee injury

If your employee gets injured during work, the insurance does not cover for such claims. A separate policy called workers compensation insurance helps you compensate the employee following workplace injuries. However, if the injury is due to a company-manufactured machine, the employee can sue your company. In such cases, product liability insurance can help you pay for such a claim.

Vendor’s endorsement 

This endorsement extends coverage of product liability insurance to vendors who distribute or sell your products. Even if a vendor already has insurance in place, this endorsement provides coverage above any other coverage that the vendors may have. Vendor’s endorsement lets your distributors or retailers sell your products without fears of financial injury from liability suits.

how-much-product-liability-insurance-do-i-need

Do You Need Product Liability Coverage?  

A small or large company, business to business or business to customer operation module—if you produce, sell, or distribute any product, you are exposed to the risks of product liability suits.

As per the Insurance Information Institute, the median claims award for a product liability suit was $15 million, and the average figure was $5.1 million in 2017. However, the median is more representative as the average amount may be a skewed figure based on a few extremities.

When it comes to product liability suits, they are not limited to users of the product. Anyone can sue you. For instance, a person may fall on the ground and get injured. Considering the extra slippery floor, the injured party may file a suit against the construction company, making it liable for settlement costs. Remember that, even if you face a frivolous lawsuit, you incur legal defense costs.

Cost of Product Liability Insurance  

Several factors determine the cost of insurance:

Nature of business 

The nature of your business significantly affects your premium rates. Some industries are riskier than others. For instance, pharmaceutical, medical, and automotive businesses have more significant risks. Hence, they pay relatively higher premiums.

Position in supply chain 

Manufacturer, wholesaler, or retailer, you are exposed to the risks of liability suits. However, your position in the supply chain defines the degree of exposure. For example, manufacturers are exposed to more severe claims than a distributor.

Business size 

The size of your business based on revenue and number of employees affects your cost of insurance. The greater the size, the higher the premium.

Products 

A conglomerate is exposed to greater product liability risks than a company that sells a few product lines. Therefore, the former pays higher premiums than the latter.

Quality control 

If you implement enough quality control measures to mitigate product liabilities, your insurer is likely to reduce insurance costs. Implementation of adequate quality control procedures results in lower chances of litigation.

Loss control  

Insurers appreciate any effort to control losses. If your company puts a label with clear instructions regarding the product’s use or assembly, you have already taken a loss control measure. Such information can help prevent injuries or damage. Such risk control techniques help lower the cost of insurance.

 Claim history 

Higher claims reflect higher risks. Companies that have a history of previous product liability claims pay a higher premium. On the other hand, if your claim history is null, you will have a lower premium.

A lawsuit is no more than a fancy word in the news, or a stirring event in articles until it knocks at your door. And when it does, you may face heavy losses. That is if you don’t have product liability insurance. Protect your business and get a quote today!

Which Insurances May Include a Product Liability Policy?  

The following insurances may extend product liability coverages:

  1. Nonprofit Insurance
  2. Food Insurance
  3. Restaurant Insurance
  4. Construction Insurance
  5. Beauty Insurance
  6. Personal Trainer Insurance

    Has this article been helpful to you? Leave a comment below and share your thoughts with us.

    Find an agent to discover the the liability coverage that suits your needs.

    Multiple coverage options on your fingertips.

    Choose from various options and select the policy
    that best suits your requirement.

    FAQs

    Is software or app-related problems covered by product liability insurance?

    Product liability insurance does not cover software, applications, or other IT related problems. Instead, you can opt for errors and omissions insurance. Product liability coverage involves compensation for, say, property damage resulting from a battery explosion due to faulty manufacturing.

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